The Implications of PEO Co-Employment for Small Businesses

A PEO can help by assuming and sharing employer responsibilities through co-employment. The PEO will be responsible for payroll, employment taxes and employee benefits packages while the client company controls day-to-day operations and job functions. Brokers need to understand that co-employment is not the same as employee leasing. Read on to learn more.


While the employer’s responsibilities are passed on to a PEO under co-employment, the client organization still handles business decisions. It includes the day-to-day operations and business activities that involve a company’s employees, vendors or customers. A PEO does not step in during these activities and is not a replacement for a business’s human resources team. The best PEOs are certified by outside agencies like the IRS and Employer Services Assurance Corporation (ESAC). Their accreditation is a mark of quality, meaning they have met stringent standards regarding HR practices, financial stability and compliance with tax law.

In addition to payroll service and other administrative tasks, PEOs can help small businesses hire and retain employees. It is especially helpful for SMBs seeking new talent in a tight labor market. They can also provide various benefits, including medical, dentistry, vision, life insurance, and retirement programs to entice and keep employees. The other key benefit of working with a PEO is cost savings and reduced risk. They can access group insurance rates, which provide significant savings and less rate volatility than would be possible on a small business’s own. In addition, they can often give access to a Master Health Plan, a comprehensive group health insurance plan offering higher-quality healthcare at lower costs.

HR Compliance

If your company lacks the resources to hire a full-time human resources worker, PEO co-employment may be the answer. With this type of partnership, a PEO becomes the co-employer for insurance, payroll and HR purposes. At the same time, the client business remains solely responsible for the management, scheduling, compensation decisions and workplace safety. This arrangement allows you to reclaim time and resources to focus on the core activities that make your company unique. It also allows you to access world-class processes, systems and benefits, like health insurance and 401(k)-plan matching contributions.

A PEO can provide information and guidance regarding state and federal compliance to help you stay on track with regulations and requirements. For example, a PEO might remind you to post the required labor law posters in your workplace. However, it’s up to you to take the necessary steps to meet your compliance obligations. One potential drawback of working with a PEO is losing control over your most valuable resource—your people. Because a PEO has many clients, communication with them might be delayed, or it might not be easy to get the personal attention you would receive from a full-time employee who manages your human resources department. However, this is a small price to pay for the peace of mind that comes with knowing your company is in good hands.

Payroll Processing

Most PEOs use a co-employment model, which puts some HR responsibilities in the hands of the PEO and some in the business. The scope of these responsibilities is clearly outlined in the contract – which can be amended as necessary. The business owner retains control of strategy, goals and daily to-dos. As a result, a reputable PEO can free up the company’s managers to focus on growing the business and making key decisions.  Another benefit of a PEO is its ability to provide competitive employee benefits. It is achieved by aggregating the employees of many small businesses together to gain buying power with insurance companies. The resulting package can include medical, dental and vision coverage and retirement and health savings options.

In addition, a good PEO will be flexible when it comes to adjusting to changing conditions. For example, during the COVID-19 pandemic, a PEO could help its clients reassign workers to different shifts and change employee hours as needed. This flexibility also helped companies avoid fines and penalties that could have resulted from a failure to comply with strict employee-protection laws. This flexibility is one of the most compelling reasons many companies opt for a PEO.

Time Management

When a business partners with a PEO, it offloads many HR and payroll functions while maintaining control of day-to-day employment decisions. A co-employment relationship allows the business to remain in control of hiring decisions. At the same time, the PEO takes over other duties such as workers’ compensation insurance, payroll processing and employee enrollment. A PEO can free up a significant amount of time for businesses by taking on these tasks. It gives business operators more opportunities to spend on operations and building a strong team. As a result, PEO clients tend to outpace similar-sized businesses in growth and longevity. A PEO can also handle employee benefits. By aggregating the employees of many small businesses, a PEO can leverage buying power to offer more affordable rates on medical, dental and vision coverage, comprehensive retirement plans, auto and home policies and commuter benefits. Additionally, a PEO can assist with workplace safety, workers’ comp filings and unemployment insurance claims, and addressing compliance matters like equal pay for men and women and family and medical leave.

A PEO’s set services typically include payroll, HR and compliance support, while some may have add-on services. It can include recruiting and workforce planning assistance, training and coaching support, leadership development and consulting services, and succession and exit planning. In the end, a trustworthy PEO will be more than simply an HR supplier; they’ll also be a partner who cares about your company’s long-term success.

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